Imagine an announcer came on TV and said, “Welcome to the 2008 Bank Telethon. You’ve heard all the horror stories. Now, with the holiday season approaching, I know you’ll want to reach deep into your pockets to lend a hand.”
“I know what you’re wondering: How much should I give? Well, the banks need $250 billion. I know–that sounds like a lot of money to raise in just one telethon. But if each household in America gave just $2000, then we could reach our goal. So let’s get every household in America to pledge $2,000 to the banks so that they can start lending again.”
If that were the announcer’s pitch, would you give the $2,000?
Guess what. You just did. Thanks to Tyler Cowen for the pointer.
It’s a good thing that the banks are getting your $2,000. That will save the economy. If you had given $2,000 to the charity of your choice, that would do nothing to help the economy. Thank our leaders for protecting us from such evil impulses.
READER COMMENTS
TomM.
Oct 13 2008 at 11:07pm
Tell you what. Let’s all borrow $2,000 from our bank, donate it to charity, and then default. That’ll show ’em!
mgroves
Oct 13 2008 at 11:14pm
Harry Reid says taxes are voluntary. So I ain’t payin’!
sbl
Oct 13 2008 at 11:15pm
Hilarious. But what do you predict the outcome will be?
EconNewbie
Oct 14 2008 at 12:27am
Would the best protest be to never again use the banks listed in Mr. Cowen’s post and put your money in other banks? Or would that cause another crisis? I’m confused.
Gary
Oct 14 2008 at 12:39am
You might extend that reductio ad absurdum to Keynesian interventions in general. “Stimulus” spending is like a nation-wide contract where everyone agrees to spend 5% more next month than they had otherwise planned to. That would get producers producing and consumers consuming again, and the whole virtuous cycle would be reinforced. Phrased that way, though, few people would agree to such a contract.
The idea seems silly because people would have to buy things they wouldn’t otherwise buy – in other words, spend wastefully.
E. Barandiaran
Oct 14 2008 at 3:23am
Arnold,
You can cry a lot about the emerging “package of measures” to rescue financial institutions. But let me say that it is the unintended consequence of the positions taken by you, Tyler and many other economists that have ignored the theories of incentives and public choice for which some economists earned the Nobel Prize as well as the experiences of other crises (in particular, Chile 1982-83). As they say in Buenos Aires, “a llorar a la Iglesia.”
El Presidente
Oct 14 2008 at 12:13pm
Mogden,
Don’t worry, the next telethon will be to give $2000 back to each household.
We should be so lucky.
____________________________
Dear Hank and Ben,
So, if we give banks our wealth, is there any guarantee they will lend it back to us, since we were such bad investments to begin with? And if they do lend it back to us, where will we get the income to pay for the interest? How will this enhance the ability of the average borrower to repay the loans that these funds are ostensibly intended to facilitate. Or, . . . are you not doing this for the average borrower? Are you doing this instead as a form of profit insurance? If so, why didn’t you advocate more investment in things that really insure profits by improving the efficiency of labor, like education, and less in things that are known to produce no net profit, like war? Just curious.
Yours Truly (since you own me now)
A Citizen
Dan Weber
Oct 14 2008 at 5:35pm
Would the best protest be to never again use the banks listed in Mr. Cowen’s post and put your money in other banks?
According to some news reports (including the section cited at Cowen’s blog), the injection was not voluntary. So it seems kind of wrong to punish these banks for that.
InfectiouSoul
Oct 14 2008 at 5:50pm
How about 700,000 million dollar home pages, or one http://www.700billiondollarhomepage.com
Dr. T
Oct 14 2008 at 7:37pm
mogden writes:
No, the next telethon will be to give $10,000 to the one-fifth of households who are deemed most worthy of a cash infusion. Who does the deeming? That’s a fight between Congress and the Executive branch.
Asia (WCU)
Oct 16 2008 at 10:50am
I must say that I was very confused about this notion when I read it, but Gary made it clear for me in this comment:
“The idea seems silly because people would have to buy things they wouldn’t otherwise buy – in other words, spend wastefully.”
My problem with this is that as a college student and the daughter of middle class parents, it is hard to live comfortably now with the price of gas, etc. So it seems to me that the government is asking for us to struggle more for the good of the economy in the long run. I just dont see how that would work out. If people have trouble paying making ends meet now, then what money is left to squander?
El Presidente
Oct 16 2008 at 1:45pm
Asia (WCU),
My problem with this is that as a college student and the daughter of middle class parents, it is hard to live comfortably now with the price of gas, etc. So it seems to me that the government is asking for us to struggle more for the good of the economy in the long run. I just dont see how that would work out. If people have trouble paying making ends meet now, then what money is left to squander?
The good of the economy, as commonly defined, is a nebulous thing. If we are speaking strictly of realGDP and/or realGDP-per-worker, these measure still fail to account for the effects of changing distribution. If distribution of income becomes too disparate, wealth congregates in fewer and fewer hands and the velocity of money declines as a result of diverging incentives for exchange. That means that, in effect, they might be asking you to struggle more but not necessarily even for the good of the economy in the long-run. When velocity declines, output or national income can decline as well. This was the observation of Marriner Stoddard Eccles, Chmn. of the Fed under FDR, and the lingering concern of Milton Friedman that led him to advocate a negative income tax.
Investment and consumption have to be somewhat balanced (not equal, but balanced) for either of them to work well. Curtailing consumption to increase household and government savings may or may not produce presumed beneficial effects in the aggregate depending on how income and tax burden are distributed. There is no doubt that you are being pressured to tighten your belt (“asked” is too nice a word), but one should be a little more curious as to why, how this is supposed to help “the economy”, and what period of time is given as “the lon-run”. As Lord Keynes said, “Long-run is a misleading guide to current affairs. In the long-run we are all dead.”
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